Question

Let's say there's a company that can fully tax deduct the interest on its loans. If this company borrows more, then the discounted value of the tax shield on its loans will _____ and the discounted value of the financial distress costs will _____. g

Answer 1

High

Low

Step-by-step explanation:

When a company borrows funds it has opportunity to avail tax shield on the interest amount of the borrowing fund. If the company borrows more fund then the discounted value of tax shield will increase while the financial distress cost will decrease.